Don’t Worry about China’s Currency, Worry about Where the Chinese Spend It

You reckon these currency wars are bad? Well, they are. Thanks to China, things have taken a serious turn for the worse.

The Chinese government just loves to stir things up.

The devaluation is causing a spot of bother. There is no doubt about that. But there’s something else China is doing. And this is also causing a problems not for world economies, but for high-flying Chinese officials.

And the flow-on effect is some tough times for luxury retailers.

In the past there’s been a problem with doing business in China. You see, corruption was the word always on the tip of the tongue. Officials would splurge on gifts for corporate big wigs.

Officials would use leverage like something as small as a gift of chocolates or as big as a Swiss watch…or even a car.

President Xi Jinping was first to admit China’s problem. As far back as 2012 when he took office, he said it had to end.

And he’s been chipping away at it. But now it’s having real effect. But it’s also having real effect on companies that the corruption money would eventually flow to.

Take for instance Swiss watchmakers. The global watch industry makes around 1.2 billion watches a year. The two dominant countries in watchmaking just happen to be China and Switzerland.

Switzerland is big because of the value of their watches. China is big because of the volume of the watches.

In terms of value and output the two markets couldn’t be more different.

Quartz reports in 2012 that the value of Switzerland’s watch exports was $22.9 billion. Yet they only made 29.3 million watches.

China on the other hand had an export value of $5.1 billion in watches. But the number of units was 678.5 million. The chart below highlights the differences.

It’s well known the Swiss watch industry is alive and kicking thanks to China.

In 2000 the value of Swiss watch exports to China was CHF16.8 million. By 2012 the value was CHF1.6 billion. In the space of 12 years the Chinese market pushed a 100-fold increase.

But recently things have taken a turn for the worse.

In July this year sales in Asia were down 21.4%. SKY News explains that consumers in China, ‘bought nearly 40% fewer Swiss watches than … last year.’

It’s hurting the big watch makers.

The Swatch Group SA [VTX:UHR] share price is down over 8% in the last month. LVMH Moet Hennessey [EPA:MC] (who own Tag Heur) is down 12% in the last month.

And none of this takes into account the currency devaluation. That’s going to hurt even more as it makes imports to China more expensive.

But don’t think it’s just Swiss watches taking a beating in China, either.

Car companies are copping it in the neck too. Volkswagen AG reports that sales to China fell 3.9% in the first six months of this year. That might not sound like much. And it’s not really. They will still sell millions of cars in China.

The important thing is that this is the first decline in Chinese sales in 10 years.

Audi (owned by Volkswagen), BMW and Jaguar Land Rover are all on a downtrend. They all cut sales target in China this year. JLR is even offering sales on cars. When was the last time you saw a Jaguar sale? I’ll tell you when, never.

Even the casinos can’t win

In February a Hershey’s spokesperson made a bold prediction. They said sales in China could grow to $4.3 billion by 2019. Driving the growth would be the growing urban population.

Oh boy were they wrong. So very wrong.

This month Hershey’s said sales of their ‘Golden Monkey Chocolates’ would be less than half the $200 million they expected this year. Just a short six months later.

That’s a massive change in demand for chocolate.

A part it is because of the share market. It’s driving consumer confidence down. And that hurts spending on things like chocolate. Another part of the falling demand is the currency wars. Importing goods becomes more expensive. When people are already worried, that doesn’t help at all.

But it’s also because of Jinping’s crackdown on corruption.

Even the casinos can’t win

Even the gambling industry is doing it tough. Macau it the only place to legally gamble in China. In 2007 Macau passed Las Vegas in terms of gambling revenue.

Profits there have been huge.

But now profits are down by 40%. Galaxy Entertainment Group [HKG:0027], Melco Crown [NASDAQ:MPEL], MGM China Holdings [HKG:2282] and Wynn Macau [HKG:11:28] are all battling.

You know things are bad when the casino can’t even win.

No longer are Chinese officials allowed to spend up big on entertainment. They can’t buy, give or offer expensive gifts to company executives or just ‘friends in high places’.

The party is over.

Or is it?

It’s not about where the money is, but where they spend it

So the money isn’t going to luxury goods in China.

That doesn’t mean it won’t go somewhere. Sure, it won’t be on gifts to and from corrupt officials. But there’s still a lot of money to spend. If it’s too expensive to buy in China, well just get it elsewhere.

That means there’s a massive chance to cash in on the growing tourist shopping trade.

Don’t worry about where the money is. Worry about how and where they’re going to spend it.

The Fortune Charter Institute is a Chinese research organisation. They have put together some statistics that explain in 2014 luxury sales in China fell by 11% to US$25 billion. But similar purchases made by Chinese consumers overseas grew by 9% to US$81 billion.

Now that was in 2014, before the plummeting Chinese markets and before the Chinese government decided to fiddle with the yuan.

But I see that as a massive opportunity. And where else would Chinese luxury money be best spent than Australia? Instead of these (still wealthy) Chinese middle class flying to the US, the UK or Europe to spend their luxury money, why aren’t they flying to Sydney or Melbourne?

Why isn’t there a big push from Australia’s tourism board to get Chinese tourists spending their money on Aussie shores? In mid 2014 there were around 2.8 million Chinese that were classified as ‘millionaires’. And in the 2014 year to September around 789,000 Chinese tourists came to Australia. They spent an enormous $5.4 billion in the local economy! That’s on average $6,844 per tourist.

If I wanted to spur the Aussie economy I’d be flying them in for free and subsidising Qantas for their airfares.

Perhaps that’s the real answer to Australia’s problems, and China’s. You’ve got a whole heap of Chinese that are struggling with the plummeting markets and devalued currency. Maybe they should take a well needed holiday?

Come to Australia, visit our beautiful cities, visit the ‘Paris end’ of Bourke Street, and leave with swathes of Prada and Chanel bags. Sure they’re not Aussie companies but the money still goes to wages, rents, utilities and taxes. It all helps keep things ticking along.

What I’ll be looking to see is which travel based companies like Qantas [ASX:QAN], WebJet [ASX:WEB] or Virgin Australia [ASX:VAH] and which retailers like Oroton Group [ASX:ORL] or Premier Investments [ASX:PMV] can really tap into this lucrative opportunity.


Sam Volkering

Editor, Money Morning

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Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

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